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What happened

The government intends to introduce a mechanism for permanent regulation of grain exports. On Thursday, February 4, the head of the Ministry of Economic Development Maxim Reshetnikov reported to President Vladimir Putin on the development of a “price damper” mechanism, the essence of which is the introduction of a “floating” duty on grain export with the subsequent return of these funds in the form of investments in agriculture.

The “price damper”, according to the minister, will consist of two parts (the head of the Ministry of Energy spoke about the details of the mechanism at a briefing held after the meeting with Putin in the White House). First, Russia is introducing a “floating” export duty on grain on a long-term basis – it will be determined depending on current export prices. The size will be calculated using the following formula: if the world price of wheat is up to $ 200 per ton, the duty will not be charged. But if the world price of wheat exceeds this level, the exporter will have to pay a duty of 70% of the amount by which the base price is exceeded. But the final amount of the duty will be determined by the Ministry of Agriculture based on the price of the contract on the exchange (the prices of export contracts will be registered and published by the platform from April 1).

To this end, the government will introduce a mechanism for registering export contracts on the exchange, which will publish prices, from April 1. The grain export duty, calculated according to the new formula, will begin to operate from June 2 “based on the results of the calculation of prices, determination of the base and indicative prices” and will be recalculated once a week, the head of the Ministry of Economic Development said. Until then, wheat will be subject to tariffs within the tariff quota that the government set in December last year. A similar floating duty will be imposed on the export of barley and corn.

The second part of the “price damper” is a mechanism that will return the money received by the state from the export duty to agricultural producers in the form of subsidies to growers. The money from the export duty “goes to the common pot,” but then returns to the corresponding region in proportion to the volume of grain that he produced, and the local authorities will bring it to agricultural producers, Reshetnikov points out.

The Ministry of Agriculture clarified that they had prepared and submitted to the government the rules for granting subsidies to agricultural producers within the framework of the new mechanism. The new support measure provides for compensation of part of the cost of production and sale of grain at a rate per ton of products sold, adds a ministry official. According to the agency’s estimates, about 40 billion rubles received from export duties on grain can be allocated to support producers in 2021.

How the state restricted grain exports

In December 2020, to stabilize prices for bread, flour and grain, the government introduced a tariff quota for the latter’s exports. According to it, from February 15 to June 30, 2021, 17.5 million tons of grain can be exported outside Russia. From 15 February, wheat exported outside the country will be subject to a duty of € 25 per tonne within the quota. Grain exported in excess of the quota must be subject to a duty of 50% of the customs value of the exported product, but not less than € 100 per ton. In March, the duty will increase: from March 1 to June 30, 2021, the rate on the export of wheat will be € 50 per ton. In addition, duties on the export of corn (€ 25 per ton) and barley (€ 10 per ton) will be introduced from 15 March.

According to the Sovekon analytical center, current export prices for Russian wheat are about $ 285-290 per ton

As the analysts of the SovEkon company pointed out in the report, the demand on the domestic market remains low: buyers expect more favorable prices, and exporters have probably already bought enough grain for the nearest deliveries. Agricultural producers are forced to gradually lower prices, analysts stated, expecting a “continued downward trend” in the ruble wheat market. Average prices for wheat of the third and fourth class are 15.4 thousand and 15.35 thousand rubles. per ton, respectively, of the fifth class – 14.55 thousand rubles. per ton.

Why new regulation was needed

The export duty on grain as a long-term mechanism is introduced to stabilize domestic food prices and protect the Russian food market from fluctuations in world prices, Reshetnikov explained to Putin, and later at a briefing at the White House. In December 2020, the head of state was outraged by the fact that basic products rose in price in Russia: sugar, as he pointed out, increased in price by 71.5%, sunflower oil – by 23.8%, flour – by 12.9% , pasta – by 10.5%, bread and bakery products – by 6.3%. The pandemic has nothing to do with it, Putin said, and linked the rise in prices with an attempt to “adjust domestic prices to match world prices, as well as use export opportunities.” Bakery and pasta rose in price due to rising prices for flour, which, in turn, rose in price due to rising prices for the main raw material – wheat, the producers explained. The price of grain rose, as the then president of the Russian Grain Union, Arkady Zlochevsky, explained, due to the devaluation of the ruble and the rise in world prices, which was provoked by Russian policies and the regulation of grain exports.

Food prices are rising on world markets, and Russia is the world’s largest exporter of grain, so the rise in world prices has spread to the domestic market, Reshetnikov said at a briefing at the White House. At the same time, during a conversation with Putin, he emphasized that the task of the “price damper” is not to collect money for the budget, but to ensure, on the one hand, stable, understandable and affordable food prices for the population, and on the other hand, to motivate producers to further develop and increase sowing crops. area and grain processing. For this, according to the minister, a mechanism is needed that will return the money received from the duty as investment in agriculture. The return to farmers of the funds received from the export duty will prevent a decrease in their incomes and a drop in agricultural production due to the introduction of duties, adds a representative of the Ministry of Agriculture.

How the initiative will affect wheat prices

The proposed measures, according to Reshetnikov, will be enough to curb the rise in prices for wheat and, accordingly, for all products where it is used in the domestic market. The Ministry of Agriculture expects that the effect of export duties “will stabilize the price situation.”

The mechanism proposed by the Ministry of Economic Development and Trade is an “extremely tough” method of price pressure on the market, Zlochevsky said. In his opinion, the introduction of a “floating” export duty on grain may not reduce, but on the contrary, provoke a rise in prices. Restricting exports by the world’s largest grain supplier, which is Russia, will heat up world prices, which, in turn, will affect the cost of grain on the domestic market, the expert believes. However, with a duty of more than € 50 per ton, Russian wheat is uncompetitive and the countries that are now buying it may reorient themselves to other suppliers, which, in turn, will lead to a decrease not only in prices, but also in production, the interlocutor of RBC is pessimistic. For example, durum wheat with a high protein content, which Russia supplies abroad, is not in demand on the domestic market, producers will be forced to sell it at a price below the cost price, and subsequently switch to growing other crops.

How wheat and bread prices depend on wheat

The correlation between the prices of flour and grain is direct: in the prime cost of the former, the share of the latter accounts for 85–90%, says President of the Russian Union of Milling and Groats Enterprises Arkady Gurevich. If the grain becomes cheaper, the price of flour also decreases “with a certain time lag”; although in the event of a rise in the price of grain in recent years, the price of flour cannot rise in direct proportion, he laments: bakers do not take expensive flour from millers, because the price hike for bread is not accepted by trade networks.

If we talk about mass varieties of bread (“Nareznaya” loaf and “Darnitsky” bread), which are consumed most in Russia in terms of grams, the share of flour in their selling price can reach 40%, according to the chairman of the National Union of Bakery Sergey Shchedrin. As for the retail price, it is difficult to estimate the share of flour in it, since the chain’s margin takes a large share of the price on the shelf, he recalls.

In the prime cost of pasta, the share of raw materials (durum and soft wheat) can reach 80%, Dmitry Leonov, deputy chairman of the Rusprodsoyuz association, previously estimated.

Source: RBK

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EDITOR’S NOTE: This article is a translation. Apologies should the grammar and / or sentence structure not be perfect.

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